Another look at spread trading strategies on the S&P 500

Written by Robert Stewart & Phil Seaton Thursday, 12 August 2010 11:00

The problem facing spread trading participants is that the markets are offering no short term guidance.

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Spread trading strategies are being tested by unstable market conditions, here Phil Seaton & Robert Stewart at LS Trader take a look at possible spread trading strategies for the S&P 500:

Today we are continuing our series of posts of spread trading strategies for the S&P 500 as the markets continue to be undecided on short term direction.

The past couple of days have seen some movement in the markets during the build up to the Federal Reserve meeting held yesterday.

During that meeting the Fed downgraded their recovery outlook and said that interest rates would remain exceptionally low for an extended period.

This is not at all surprising and is in line with my own fundamental view on the markets long term.

Since our last post, the S&P 500 has still be unable to clear the resistance level that we have been writing about for what seems like an age now. Resistance is still holding at 1129 on the September contract but at the same time any declines down towards 1100 are also being rejected and this can be seen by the long lower shadows formed on the daily candles.

The past seven sessions have therefore held within a range from 1127.5 to 1102 and a break out from that range could give some decent movement in the direction of the breakout.

We also have a rising wedge pattern that is moving in to a narrower range and this also adds weight to a decent move from the eventual breakout.

Long term the trend is still down for the S&P 500 so I’m still favouring spread trading strategies from the short side only and will continue to do so until we get a change of long term trend to up and that is some way off at present.

The 200 day moving average is currently sitting at 1106 on the September contract which is just below yesterday’s lows. Therefore this would be the first downside target, followed by 1100. If the market can break down through this support area then we may see a continuation lower towards 1050.

Good trading

Phil Seaton & Robert Stewart
www.LSTrader.co.uk